According to the trustees report released today, the 2012 Social Security surplus is projected at $57.3 billion in 2012. Social Security will continue to run a surplus through the end of the decade. As a result, the trust fund will grow from $2.74 trillion in 2012 to a peak of $3.06 trillion in 2020 (Table VI.F8 on p. 206).

Social Security is now running a “cash-flow deficit,” which means it is running a deficit if you exclude the $110.4 billion Social Security is earning in interest on trust fund assets (Table VI.F8 on p. 206). Social Security will begin running a deficit as it is commonly understood in 2021, when it begins drawing down the trust fund to help pay for the Baby Boomer retirement. This is perfectly natural: the trust fund was never supposed to grow indefinitely, but was meant to provide a cushion to help pay for the retirement of the large Baby Boom generation. That said, the Great Recession and weak recovery pushed up the date that Social Security will first begin to tap the trust fund to help pay for benefits.

If nothing is done to shore up the system’s finances, the trust fund will be exhausted in 2033, three years earlier than projected in last year’s report (p.3). When the trust fund is exhausted, current revenues will still be sufficient to pay 75 percent of promised benefits (p. 11). Even in this worst-case scenario, future benefits will be higher than current benefits in inflation-adjusted terms, but because wages are projected to rise over time, these benefit levels will replace a shrinking share of pre-retirement income.

The projected shortfall over the next 75 years is 2.67 percent of taxable payroll (0.96 percent of GDP). This is 0.44 percentage points larger than in last year’s report (p. 4 and Table VI.F4 on p. 197). Slightly more than one-tenth of the deterioration (0.5 percentage points) is due to the changing valuation period, and the rest is due to updated data and near-term projections and changes in longer-term assumptions.

The single biggest factor is the weak economic recovery, which has a significant impact on the short-term outlook (slower growth in average earnings, low interest rates, and high unemployment). The short-term outlook is notably more pessimistic than either the Congressional Budget Office or many business economists forecast, assuming that unemployment will remain above 8.9 percent in 2012 and above 8.0 percent through 2014 (see Table V.B2 on p. 105). The weak economy is also to blame for short-term drops in birth and immigration rates, which have longer-term demographic repercussions.

Other changes appear unrelated to the weak economy, notably an assumption that average hours worked will decline by 0.05 percent per year (no decline was projected in last year’s report). This is explained as due to an aging workforce as well as “historical data and trends.”

Changes since last year’s report Change in 75-year balance (% of taxable payroll) (1) Change in valuation period: -0.05 ppts. (2) Change in short-term economic projections due to weak recovery and higher-than-anticipated cost-of-living adjustment: -0.14 ppts. (3) Changes in demographic assumptions: -0.05 ppts. (4) Assumption that average hours worked will decline: -0.07 ppts. (5) Increase in projected disability rates: -0.04 ppts. (6) Changes in various methodological assumptions: -0.08 ppts Total after rounding: -0.44 ppts

Here’s an ad (chosen at random), typical for the fashion industry these days, that brazenly flouts the federal and state minimum wage laws:

Production Intern

The Cynthia Rowley Production Team is currently looking for interns for Summer 2012. [We are also looking for interns to start IMMEDIATELY as well!!] — Summer 2012 interns would be expected to start at early-mid May to August. [if you can start sooner, that is even better]

Cynthia Rowley has long been a fashion and style authority, with a namesake collection that includes women’s wear, beachwear and wetsuits, men’s wear, eyewear, handbags, shoes, baby, home sewing products, tools, legwear, shapewear, and ‘dress-up’ band-aids.

Cynthia has appeared on “Project Runway” and “America’s Next Top Model,” and her work has been featured in nearly every major magazine and newspaper domestically and internationally. She is also a judge on the new show “24-Hour Catwalk” with Alexa Chung.

INTERNSHIP DESCRIPTION:
The intern would be required to work closely with the production team and would have a range of responsibilities which include running errands from our studio/offices to the garment district in midtown, working on tech packs, specing garments, organizing production pieces that come in, deal with showroom/runway samples and fit samples, source trims & fabrics for production, taking pictures of garments, assisting in fittings etc.

QUALIFICATIONS:
-Interns should have basic knowledge of Adobe Photoshop and Illustrator, Microsoft Office programs (Word & Excel)
-Interns should be familiar and comfortable with specing garments
-Comfortable doing light pattern work & pattern corrections
-Know how to cut patterns and fabric for samples
-Interns need to be energetic and outgoing… they will be interacting with many people within our offices (design team, PR team, etc), cutting rooms, and domestic factories in midtown
-Organized and responsible
-Have good time management
-Punctual

**THIS IS AN UNPAID INTERNSHIP, but it would be a great hands-on experience in the fashion industry and a resume booster! If you need the internship for school credit we would be more than happy fill out any required paper work and/or complete letters of recommendations.

Please send all resumes and cover letters ASAP to: CRProductionInternship@gmail.com (please do not send cover letters and resumes as attachments… put them in the body of the e-mail)

Plainly, this should be a paid, entry-level position. It requires computer skills and fashion industry knowledge. There’s no pretense of close mentoring or vocational education. The intern will “be required to work.” This is employment, and this is exploitation.

But it’s a “resume booster!” That’ll help pay your rent, your student loans, and the cost of food and transportation.  Not!

According to the brand’s website, its fashions are “sold in better department, specialty, and online stores, as well as approximately sixty Cynthia Rowley retail shops around the world. … Cynthia Rowley’s collections have been featured in nearly every major national and international fashion publication, and she maintains a regular celebrity clientele including: Julia Roberts, Scarlett Johansson, Parker Posey, Kristen Wiig, Rebecca Romijn, Anne Hathaway, and Maggie Gyllenhall.”

Cynthia Rowley and most other employers in the fashion industry can afford to pay the minimum wage to their skilled, organized, and responsible employees. The New York Department of Labor should monitor “internship” postings by the fashion industry and begin enforcing New York’s minimum labor standards.

On Tuesday, Senate Budget Committee Chairman Kent Conrad (D-N.D.) marked up, but didn’t vote on, a budget modeled off of the report by National Commission on Fiscal Responsibility and Reform co-chairs Erskine Bowles and Alan Simpson (often called the “Bowles-Simpson” report), which failed to garner the requisite support of a super majority of the Fiscal Commission’s members in Dec. 2010.

A budget alternative based on (albeit significantly to the right of) the Bowles-Simpson report recently went down in flames in the House of Representatives—by a crushing vote of 382-38. Stan Collender recently published an excellent piece on the cult-like efforts and failed politics of resurrecting the Bowles-Simpson report since its demise. Essentially, politicians and pundits cling to the Bowles-Simpson report as a talisman to signal their “seriousness” about reducing budget deficits. But it’s worth looking at the dismal economic fundamentals behind the Bowles-Simpson grandstanding, because the report’s recommendations were and remain terrible economic policy. It’s just one more reminder that “popular among Washington pundits” rarely correlates with “good economic policy.”

In Dec. 2010, my colleague Josh Bivens and I estimated that the Bowles-Simpson report would have sharply reduced aggregate demand and employment by failing to accommodate near-term stimulus and prematurely moving toward deficit reduction:

“One of the guiding principles of the Co-Chairs’ plan reads “Don’t Disrupt a Fragile Economic Recovery,” but the details make clear that this is nothing but lip service to the persistent economic challenges this country will face for years. Rather than budgeting for more desperately needed fiscal stimulus in the near-term, their sole acknowledgement of the Great Recession and the painfully slow recovery since it ended over a year ago is to “start gradually; begin cuts in FY2012.”

That diagnosis has only solidified in the interim. Here was the Bowles-Simpson four-pronged approach to supposed economic stewardship:

• Reduce the deficit gradually, starting in FY2012
• Put in place a credible plan to stabilize the debt
• Consider a temporary payroll tax holiday in FY2011
• Implement pro-growth tax and spending policies

How prudent would it be to have begun deficit reduction in fiscal 2012? At the start of the fiscal year (Oct. 2011) the unemployment rate stood at 8.9 percent and real GDP had grown a meager 1.6 percent in the year to 4Q 2011—not exactly the robust recovery that could accommodate deep fiscal retrenchment. Fiscal stimulus required more than consideration and a fully paid for payroll tax holiday—bigger deficits and a mix of spending measures and targeted tax cuts were needed (and actually enacted, albeit on a vastly insufficient scale). And it’s downright disingenuous to pawn off big spending cuts, particularly to the non-security discretionary budget, as a pro-growth spending policy. Collectively, this amounts to economic pain with little to no budgetary gain: Berkeley economist Brad DeLong estimates that in light of current growth and interest rates, fiscal expansion is entirely self-financing with regard to the long-run fiscal outlook; conversely, fiscal contraction would be largely to entirely self-defeating.

Beneath this pretense, Bowles-Simpson proposed $50 billion in primary spending cuts for FY12 and $138 billion for FY13 (as well as $4 billion and $29 billion, respectively, in tax increases which would have exerted a much smaller fiscal drag per dollar than spending reductions). Further obstructing recovery, the Bowles-Simpson report would not have accommodated the piecemeal stimulus that Congress has enacted since Dec. 2010, including $227 billion for payroll tax cuts, $95 billion in emergency unemployment compensation, $44 billion for expanded refundable tax credits, and $22 billion for (admittedly less effective) business investment incentives.

Relative to the course Congress has taken, the adverse economic impact proposed by the Bowles-Simpson report is stark. The Moment of Truth Project rescored the Bowles-Simpson report based on the Congressional Budget Office’s March 2011 baseline. For an apples-to-apples comparison, I’ve adjusted non-interest outlays and revenue for economic and technical—but not legislative—changes to the CBO’s budget projections since that March 2011 baseline. Relative to current budget policy, the Bowles-Simpson plan would have reduced non-interest spending by $53 billion in FY12 and $79 billion in FY13 and increased revenue by $107 billion in FY12 and $167 billion in FY13 (largely reflecting the payroll tax cut). As a result, economic output would be 1.3 percent lower in FY12 and 2.0 percent lower in fiscal 2013. This shock to aggregate demand would reduce nonfarm payroll employment by 1.6 million jobs in FY12 and 2.4 million jobs in FY13, again relative to current budget policies.

Piecemeal stimulus was far from optimal—but also unequivocally preferable to a deficit reduction grand bargain that would have thrown recovery off track. This isn’t to suggest that Congress has done a bang-up job with economic policy since Dec. 2010; the Budget Control Act (i.e., debt ceiling deal) was terrible fiscal policy and passing the entire American Jobs Act would have done substantially more to reduce joblessness than merely continuing the payroll tax cut and emergency unemployment compensation. But the public should be relieved that American policymakers haven’t fully embraced European-style austerity, thereby choking off economic recovery with nothing to show for it. It’s time for Washington to stop trying to breathe life back into the Bowles-Simpson plan and let it die the obscure death it deserves.

Policymakers in D.C. have a long history of focusing on the wrong problem (how many screamed about the housing bubble and buildup of private debt in the mid-2000s, for example?). This history continues today – you can’t follow economic debates taking place inside the Beltway for long without inevitably hearing somebody thunder about the “burdens we’re placing on our children and grandchildren” with current budget deficits. This formulation has become so common that almost nobody bothers questioning it anymore. But in fact, policies aimed at cutting today’s budget deficits are actually more threatening to our kids’ economic futures than these deficits themselves.

It may help to review the economic case for when one should worry about budget deficits. If the government begins running large deficits when the economy is healthy, this means that it must increase the money that it’s borrowing, essentially walking into the market for loans and sharply bidding up their demand. This increase in demand will cause interest rates (the “price” of borrowing) to rise, and these new higher prices will convince private companies to forego some investment projects that they otherwise would have undertaken. This results in a smaller capital stock and hence less-productive economy bequeathed to the next generation. Voila, generational theft!1

The responses to why these arguments do not apply to the current situation have been made many times before. The price of borrowing has not risen, and that’s not an unsustainable fluke. Instead, it’s precisely because the economy is depressed. So, no private capital formation is being crowded-out (and in fact, lots is probably being crowded-in as government deficits support spending and demand, and this spending and demand is actually the biggest near-term driver of private investment) – in fact, private-sector capital formation, after a horrendous fall during the teeth of the Great Recession, is one of the few real sources of strength in the latest recovery.

But is it really so bad that policymakers want to attack a non-existent problem (i.e., the federal budget deficit crowding-out private investment)?

Yes.

Most importantly, near-term reductions in deficits will place a substantial drag on an already-weak recovery. Given that the economy grew at less than 2 percent in 2011, this is not the time to be sharply applying the brakes.

Further, if frantic efforts to cut spending result in reductions in public investments (and they will), then something truly perverse will happen: productive investments will be sacrificed in the name of … preserving productive investments.

Take a look at estimates of the nation’s wealth (pie chart below, from the Office of Management and Budget – and note as well that near-identical estimates (see p. 195) were made by the OMB during the Bush administration):

Half of the nation’s overall capital stock consists of human capital, or education. This is largely financed publicly. And, over a third of the equipment and structures capital stock is owned publicly. In short, when figuring out the actual wealth that we’re passing on to the next generation, one must take public investments into account.

Yet, we’ve already allowed this public investment to lag in recent decades. Cutting it further today and tomorrow actually would put a burden on our children and grandchildren (unlike, say, accommodating larger budget deficits). A new EPI paper released yesterday surveys estimates of just how much we could gain by engaging in a program of expanded public investment over the next decade. It is serious money for the economy, and even the federal government itself would largely recoup the costs of this investment through tax revenues gained by the extra growth and job-generation this public investment could boost if it was undertaken while the economy was still weak. And I’ve probably even underestimated this fiscal offset in the paper.

Despite anguished cries about the fate of “our children,” it seems clear that the rush to slash spending will continue and one obvious casualty is going to be the public investments that are actually valuable to the next generation. Sadly, public investment has become a bit of a political orphan in recent decades, largely because of a mid-1990s productivity surge that happened without an increase in public investment. What this has meant is that with no constituency advertising its benefits, too many people and policymakers are genuinely unaware of the stakes in cutting it. But these stakes are large – unless coming decades see something analogous to another IT boom, we shouldn’t expect post-1995 rates of productivity growth to be sustained in the face of further public investment cutbacks.

Lastly, the target list for aiming lots of public investment funds at in coming decades is long: basic infrastructure, early-childhood education, health care, and research and development. These are pretty common areas where it’s agreed that lots of public investment money could be productively channeled. But there is also the obvious case of investments to cut greenhouse gas emissions and mitigate the worst effects of climate change. There is overwhelming evidence that these are investments that should be done, and because making them would primarily benefit those children and grandchildren that policymakers in D.C. are so solicitous of, it seems like this should be a slam-dunk.

1. This is, strictly speaking, the “closed-economy” case for how deficits can harm the economy. The “open-economy” case has no more empirical support for it operating today, so we’ll skip it for now.

Apple and its key manufacturing partner, Foxconn, have been justifiably criticized for their labor practices in China, which include excessive, oppressive and illegal overtime hours, hazardous conditions, inappropriate and sometimes forced labor of 16-18 year-old student “interns” on night shifts, and wages so low that 64 percent of workers claim they don’t cover basic needs.

Many observers have remarked that with Apple’s gigantic profits, it can afford to ensure better treatment of its production workforce. A close examination of the iPhone’s cost structure leaves no doubt.

Various market researchers, including iSuppli and Horace Dediu of Asymco, have broken down the costs of the iPhone, which Apple sold to wireless carriers for an average price of $630 in the fourth quarter of 2011. All agree that Foxconn’s assembly cost— approximately $15, or 2% of the total—is a miniscule part of the iPhone’s cost. Apple’s estimated $319 profit per phone is at least 20 times the cost of producing the iPhone. In fact, because the labor cost is only part of Foxconn’s costs, which include energy, property, and its own profit, Apple’s profit per phone is more than 20 times the labor cost.

So far this year, the IRS has received 99 million tax returns and distributed an average refund of $2,794. If you still haven’t submitted your return, or filed an extension, you have until midnight to do so. Thankfully, there’s no such deadline for looking over these tax figures — as depressing as they might be:

1. The 400 highest income filers paid an average tax rate of 16.6 percent in 2007 (before the Great Recession). Dividends and net capital gains accounted for 73.4 percent of the adjusted gross income for these filers, explaining why their average effective tax rate is just a shade above the 15 percent preferential rate on unearned income.

2. Presidential candidate Mitt Romney, who has an estimated net worth between $190 million and $250 million, paid an effective tax rate of 13.9 percent in 2010 on $21.7 million in income because of the carried interest loophole and the preferential tax rates on capital gains and dividends.

3. In 2011, the top 1 percent of households by cash income received 75.1 percent of the benefit from the preferential treatment of capital gains and dividends. The middle class, meanwhile, received only 3.9 percent of that benefit.

4. Over the past 35 years, Congress has gradually lowered the top tax rate on capital gains from 40 percent in 1977 to the preferential rate of 15 percent today, courtesy of the Bush-era tax cuts. The Bush tax cuts also lowered the rate on qualified dividends—previously taxed as ordinary income—from 39.6 percent to just 15 percent.

5. The Bush tax cuts cost $2.6 trillion over the last decade, accounting for roughly half of the increase in the public debt over this period, while failing to generate a robust (or even mediocre) economic recovery.

6. Roughly half of the Bush tax cuts went to the highest-income 10 percent of earners, even though these earners captured more than 90 percent of national income gains between 1979 and 2007.

7. The top 1 percent of earners received 38 percent of the Bush tax cuts, despite capturing 65 percent of income gains during the Bush economic expansion (2002-2007).

8. Continuing the Bush-era tax cuts would cost $4.4 trillion over the next decade, which would single-handedly move the country from a sustainable to unsustainable fiscal path.

9. The additional tax cuts in Wisconsin Rep. Paul Ryan’s budget—beyond continuing the Bush tax cuts, which would be financed with deep spending cuts—have no offset and would lose $4.6 trillion in revenue over a decade, blowing a huge hole in the budget.

10. Massive, unaffordable tax cuts were also the currency of the Republican presidential primary race, with proposed tax cuts that would lose up to $900 billion annually—which at 4.9 percent of GDP would more than double projected budget deficits under a continuation of current policies—above and beyond the costly Bush tax cuts.

Follow Andrew Fieldhouse on Twitter: @A_Fieldhouse

There’s plenty wrong with this Greg Mankiw article (see here), but one thing I haven’t seen pointed out yet [ah, here’s somebody else pointing it out, with a little less snark than this post] is the strangeness of Mankiw using his textbook as an example of fierce competition in a crowded market, unburdened by meddlesome government.

What’s strange about this? Well, what keeps me from selling PDFs of Mankiw’s textbook for $5 each online? The same thing that keeps his own students (who are, by the way, assigned this textbook by Mankiw himself; I  wonder if he’s ever once decided, based on the merits, that anybody else had a superior text on the market?) from scanning the book and passing it back and forth for free: government enforcement of copyright law.

Is having government act as a bill collector for textbook companies and authors good economic policy? Probably not, but I think it’s safe to say that textbook authors pretending as if the price tag on their books reflects only supply and demand curves functioning in perfectly competitive markets probably shouldn’t be trusted on sweeping claims about the proper role of government in determining economic outcomes.

I come from a family of penny pinchers. My parents had to support themselves at young ages, and their thriftiness put them and their children through college. Though I’m a big spender compared to my parents (it would horrify them to know I’m on a first-name basis with our local Thai food delivery guy), I’m still careful to put away money for retirement.

Despite my personal predilections, I think it’s time we reexamined our knee-jerk support for tax breaks for saving. Admittedly, it’s much harder than in my parents’ day to save your way into the middle class. For instance, a new Center for Economic and Policy Research report points out that the number of hours a minimum-wage worker has to work to pay for college has more than tripled over the past three decades. Nevertheless, it’s quite difficult to design tax incentives that actually help ordinary people save—as opposed to simply lowering taxes for high-income households.

Our tax code contains a mess of contradictory provisions that both encourage and discourage saving. These range from 529 plans for college saving to the mortgage interest deduction, which subsidizes borrowing. Among the costliest of the savings incentives are those designed to promote saving in 401(k)s, IRAs and other retirement plans. According to Treasury estimates, the present value of tax breaks for 401(k) plans alone was $83 billion in 2010 (see Table 17 here), not counting payroll tax losses.

Problematically, two-thirds of these (and other) tax breaks go to taxpayers in the top income quintile (households with roughly more than $103,000 in income in 2011). Aside from the fact that upper-income households need less help saving for retirement than low- and middle-income households, these tax breaks do little to increase saving since most high-income households already save and simply steer funds to tax-favored accounts (see footnote 27 here for an overview).1

These upper-income tax subsidies are ripe for trimming. Erskine Bowles and Alan Simpson, co-chairs of the president’s fiscal commission, suggested capping tax-preferred contributions to the lower of $20,000 or 20 percent of income, as well as again taxing capital gains and dividends at the same rates as ordinary income. (The two proposals are related because the value of tax deferrals for retirement saving depends on the taxes that would otherwise be paid on investment earnings.)2

Though there’s not much else to like in the Bowles-Simpson plan, 401(k) tax breaks are a good place to look for budget savings. Even better would be reducing the contribution limit to $10,000 or less, as few people can afford a $10,000 contribution, let alone $50,000 (the maximum combined employer and employee contribution). Research by two Treasury Department analysts found that reducing the total contribution limit to $10,000 would have little effect on taxpayers making less than $75,000, but that roughly 80 percent of taxpayers with incomes greater than $150,000 (and 45 percent of taxpayers with incomes between $75,000 and $150,000) would see a tax increase. Affected taxpayers in the highest income group would lose a tax break averaging $3,166, even though the $10,000 cap would reduce their 401(k) contributions by only a third, on average.

As Drexel law professor Norman Stein points out in a working paper presented at a recent University of Virginia Tax Study Group panel, supporters of the status quo offer three less-than-compelling arguments in defense of maintaining 401(k) tax breaks: that their cost is exaggerated; that encouraging employers to offer 401(k)s on behalf of highly-compensated employees indirectly helps lower-income workers even if they reap little of the tax benefit; and that these tax incentives actually cost nothing if you believe that consumption, rather than income, should be taxed. Read more

On Monday, EPI labor economist Heidi Shierholz pointed out that job growth during the current recovery has been stronger than job growth during the recovery following the 2001 recession. In addition, the jobs recovery from the Great Recession isn’t too far off the pace following the 1990 recession; private sector job growth 33 months into the 1990 recovery was 3.4 percent, while it’s 2.7 percent for the current recovery. Shierholz’s main point is that it’s the historic length and severity of the Great Recession, and not unprecedentedly poor job growth in the recovery, that explains why we’re still so far from full employment 33 months since the recession officially ended.

Greg Mankiw, however, isn’t about to highlight that fact. Mankiw, who was chairman of the Council of Economic Advisers under George W. Bush from 2003-05 and currently serves as an economic adviser to presidential candidate Mitt Romney, posted the graph below on his blog last weekend with the dismissive headline, Monitoring the So-called Recovery:

The graph shows the employment-to-population ratio (or EPOP) going back to 2004. We see the EPOP drop steeply during the Great Recession, followed by a mostly flat trajectory since. But let’s add a line to Mankiw’s graph for a direct comparison of this recovery to the last one:

It’s clear from the figure that EPOP fell much further and faster during the Great Recession than the 2001 recession. But looking to the right of the vertical line, we see that EPOP growth (or lack thereof) in the current recovery follows the same trend (i.e., flat) as the recovery after the 2001 recession. In other words, the key difference between EPOP at this point in the current recovery versus the same point in the last recovery (during which Mankiw chaired the CEA) is the length and severity of the recession that preceded them.

Yes, this recovery is slow, and certainly there is no excuse for the current complacency from policymakers about the jobs crisis, but the folks over at Angry Bear have a good adage for Mankiw: “People who live in glass houses should be careful about throwing rocks.”

With research assistance from Heidi Shierholz and Hilary Wething

In a post today, the Committee for a Responsible Federal Budget reiterated its position that it is double-counting to argue that the Affordable Care Act both reduces the deficit and extends the life of the Medicare trust fund. Chuck Blahous, the Medicare actuary who started this mess, and Peter Suderman over at Reason agree.

Their position is wrong, wrong, wrong. First, let’s clarify the baseline. CRFB points out, correctly, that there are two baselines to choose from. The Trust Fund Baseline, which is used by Blahous, assumes that a program’s spending is constrained by the resources in its trust fund. If the trust fund is gone, the spending will automatically be cut. The Unified Budget Baseline, on the other hand, assumes that spending on programs will continue as scheduled, and the federal government will simply borrow money to ensure that benefits are not cut.

As many pointed out, the Blahous baseline is ridiculous. If spending is constrained by the trust fund, then we don’t have a problem. But the main purpose of the Affordable Care Act—heck, why we’re talking about deficit reduction in the first place!—is the assumption that we do have a problem. And even if—as CRFB states—both baselines are equally valid, it’s clear from the administration’s rhetoric that it is using the latter.

So, how can it be that a dollar can both be used to reduce the deficit and extend the trust fund? Well remember that under the baseline we’re using, program outlays aren’t constricted by the trust fund. Outlays have nothing to do with the trust fund. So therefore, extending the trust fund doesn’t cost anything, because it’s an accounting identity with no programmatic relevance.

Now, you might say that the Obama administration is being misleading, talking about extending the life of a trust fund, when under its own assumptions, the trust fund doesn’t matter. But while it may not have any impact on spending levels, it does matter for other reasons. While the size of the trust fund doesn’t determine how much spending can be done, it does potentially impact how the spending is financed. In the case of Social Security, for example, the trust fund commits income taxes (a more progressive revenue stream) in the future to redeem past surpluses financed by payroll taxes (a less progressive revenue stream); so declaring the trust fund meaningless in this case would profoundly affect the distribution of Social Security’s costs.

Trust funds also have political relevance. Even if you assume that Medicare outlays will be unaffected by the trust fund, having an insolvent trust fund opens a program up to political attacks. We’re seeing that right now with Social Security. So even if the trust fund doesn’t matter to the program’s operation, it still matters to shore of the program’s political strength. That’s something that seniors—and really anyone fond of Medicare—should care about.